Building on the Successes of Health Savings Accounts

About the Authors

Health Savings
Accounts (HSAs) allow individuals with a high-deductible health
plan to save pre-tax dollars in a personal, portable account for
qualified medical expenses. Due to their lower costs and
flexibility, HSA arrangements are rapidly gaining market share.
Congress should build on the success of HSAs by clearing away
several problems with their management and administration: (1)
authorize individuals to fund HSAs with a one-time transfer from
other health accounts; (2) allow individuals opening an HSA
mid-year to contribute up to the yearly limit; (3) give employers
the leverage to make higher contributions for low-wage workers; and
(4) simplify compliance with contribution limits by indexing and
adjusting amounts annually. These changes are included in the
Health Opportunity and Patient Empowerment Act of 2006 (H.R.
6134).[1]
In addition, Congress must make crucial changes in the federal tax
code that would level the playing field for all health care
options, including HSA-eligible plans.

What HSAs
Deliver

HSAs' quick rise
to popularity proves their attractiveness to consumers. HSA
arrangements make up a small, but rapidly increasing, share of the
health insurance market. According to a January 2006 survey
conducted by America's Health Insurance Plans, nearly 3.2 million
individuals are enrolled in HSA-qualified high-deductible plans, up
from 438,000 in 2004.[2]
The Kaiser Family Foundation recently reported that these new plans
constitute 6 percent of the employer-based market, with 2.4 million
individual employees enrolled.[3]Conservative
estimates project that one-quarter or more of employers not
offering HSA-style plans now may offer them next year.[4]

HSA-style plans
offer individuals three clear advantages that most other kinds of
health insurance arrangements do not:

HSAs build
savings. HSA-style health plans enable individuals and families
to save today for tomorrow's health care expenses, including those
in retirement. No other mechanism in the current system-either in
private employer-provided insurance or public government
programs-is designed to fund future expenses. Considering the
enormous unfunded liabilities that large private employers and
government-managed health programs face, HSAs can provide
individuals with future protection should these other sources of
health care be scaled back or unavailable.

Individuals are taking advantage of HSAs to build up savings.
According to a recent Government Accountability Office study,
approximately 55 percent of individuals reporting HSA contributions
in 2004 did not withdraw any funds from their accounts in the
entire year.[5]
Of those who did make withdrawals, 90 percent used those funds for
qualified medical expenses.[6]
A more recent Aetna study showed that 52 percent of its HSA members
did not withdraw any funds in 2005, 28 percent withdrew some funds,
and only 20 percent exhausted their accounts.[7]As
demonstrated by the way that individuals are using their accounts,
HSAs represent a vast improvement in health insurance product
development and design.

HSAs provide
affordable coverage. Critics of HSAs have been quick to
question the effectiveness of these new plans in providing low-cost
coverage. The preliminary data, however, refute this criticism. The
Kaiser Family Foundation recently reported that HSA-qualified plan
premiums are 20 to 30 percent lower than premiums in the general
employer-based market,[8]
a finding confirmed in the individual market by a similar survey by
eHealthInsurance.com,[9]
a large Internet-based health insurance broker. Likewise, a 2005
Deloitte survey found that HSA premiums increased at approximately
one-third the rate of traditional plan premiums.[10]
Reflecting these savings, data from several sources indicate that
30 to 40 percent of HSA-style plan participants were previously
uninsured.[11]

HSAs Empower
Consumers. HSAs engage individuals in health care
decision-making; as a result, individuals are making better
choices. Based on the early evidence, individuals with HSA-style
plans are more likely to seek preventative care and routine
treatments for chronic illnesses than individuals in conventional
plans.[12]
HSA-style plans, by design, create incentives for better
utilization of services and encourage price and quality
comparisons.

All individuals can benefit from an HSA-style plan. For those with
low health care expenses, HSAs provide a sufficient level of health
insurance, with catastrophic and preventative care coverage, while
freeing up dollars for future health care expenses. Individuals
with moderate health care expenses, while also benefiting from
lower premiums, have the flexibility to be prudent consumers by
exercising informed consumption choices. High-cost health care
consumers, although unable to save as much for future health care
consumption, can control how their money is spent by redirecting
dollars from costly premiums to direct payment for goods and
services that best meet their needs, preferences, and values-a
powerful instrument generally unavailable under conventional,
restrictive health plans.

The Next Step:
A Level Playing Field The Health Opportunity Patient Empowerment Act of 2006,
recently passed by the House Committee on Ways and Means, includes
needed management and administrative changes to HSAs. As good as
these changes are, however, they are insufficient. Alone, HSAs will
not fix the health care system. They work within a distorted health
insurance market where tax policy favors the purchase of some
health plans over others and where government officials and
employers still choose health plans for most individuals. While
health accounts are portable, the high-deductible plans are often
still tied to the place of work.[13]

The next target
for reform, then, should be the arbitrary and inequitable federal
tax code, which unduly favors employer-based health insurance.
Congress should fix this inequity and level the playing field.
Health insurance offered by employers or government, and
constrained by their incentives, cannot meet the needs,
preferences, or values of all health care consumers. Nor can any
single health insurance product. Individuals and families need the
freedom to make personal health care decisions without government
officials picking winners and losers for them.

Meanwhile,
Congress should refrain from adding another layer of distortion by
giving individuals a tax break or credit to purchase only
HSA-qualified plans. This preference would run counter to tax
neutrality, equitability, and simplification. Government
involvement in the health insurance marketplace, though perhaps
well intentioned, will ultimately stifle rather than enhance
freedom of choice for heath care consumers. A better policy would
be a tax credit applicable to any kind of health coverage.[14]

Conclusion

HSAs promise
substantial benefits for millions of Americans, but Congress must
realize that for a market to be truly competitive and
consumer-driven, it is necessary to have multiple, viable products
whose merits can be tested on a level playing field by informed and
empowered consumers. Congress should move forward in making HSAs
better and more attractive to consumers, but the biggest gains will
be had by fixing the tax treatment of health insurance in a way
that gives individuals real choice.

Greg D'Angelo is
Research Assistant in, and Robert E. Moffit, Ph. D.,
is Director of, the Center for Health Policy Studies at The
Heritage Foundation.

[1]As amended by the Committee on Ways
and Means on September 29, 2006.